Being a director harder than it used to be / Tougher laws, longer hours taking a toll on those who serve on corporate boards

Published 4:00 am, Sunday, September 17, 2006

The plush leather chairs in America's boardrooms are feeling a little less comfy these days.

Serving on a corporate board of directors was once a collegial gig that paid big bucks for attending a few meetings, enjoying some lovely meals, maybe taking in a few rounds of golf.

Being a board member has become far more demanding.

Tough rules enacted in the wake of the Enron and WorldCom scandals mean that corporate directors put in more time and bear more responsibility. A more demanding breed of shareholder now maintains close scrutiny and isn't shy about criticizing. The current brouhaha at Hewlett-Packard and the widening scandal over stock-options backdating have cast a harsh light on the clubby confines of the boardroom.

"The job of being an outside director involves a tremendous amount more time, energy and angst than used to be the case," said Joseph Grundfest, co-director of the Rock Center on Corporate Governance at Stanford and a former SEC commissioner. "Ten years ago, these positions would often be honorifics; today they're often horrifics."

Ultimately, that's all for the better, say corporate-governance experts.

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Board members who are engaged, active and willing to question management do corporations far more good than those who passively rubber-stamp the chief executive's agenda.

"The board doesn't need to act like the Rockettes today," said Alice Peterson, a director of apparel-maker Hanesbrands and natural-gas company Williams Partners, and an advisory board member for the U.S. subsidiary of BlackBerry-maker Research in Motion.

"Five years ago, everybody kicked together, and at the same height, and you wanted the minutes to say that everybody was in unison," said Peterson, who is president of ethics and compliance firm Syrus Global in Chicago. "We even got advice from lawyers saying that would be best. That's not true today."

If a board always voted in unanimity, it would provoke the questions, "Are people thinking in there? Did you have all the views represented?," she added.

While corporate-governance experts say it's vital for directors to engage in vigorous debate and ask probing questions, almost uniformly they decry the idea of directors repeating any of that give-and-take outside the boardroom. HP board member George Keyworth's leaks of board deliberations to journalists precipitated the investigation that crossed a line in obtaining phone records of reporters and directors.

"It's hard for me to imagine any justifiable reason for board members to leak information," Peterson said. "In the boardroom, what you want is an atmosphere of trust where you can discuss issues and be sure what you say is not going to make it into the hands of somebody who doesn't have the same goals and position you have. (Leaking) flies in the face of the environment that a board member needs to be assured of to do his or her own job."

In the case of options backdating, most governance experts said the jury is still out on what level of responsibility is borne by board members -- and it's something that' s likely to vary from company to company.

"I think the (backdating cases) show a wide range of director behavior," said Stanford law professor Michael Klausner, who specializes in corporate governance. "Some may have been rubber-stamping (management directives), some not have been. Some backdating may have been deliberate, some inadvertent. The cases that would be more likely to expose directors for risk of personal liability would be ones where they gave themselves (backdated) options at the same time as they gave management (backdated) options."

Although about 100 companies are under investigation for alleged backdating of stock options, only one, Mercury Interactive of Mountain View, has disclosed that its directors are under regulatory scrutiny. The Securities and Exchange Commission sent three Mercury directors notices informing them of potential civil actions against them, Mercury disclosed in July.

Board members clearly feel the effects of more-burdensome regulations.

For one thing, they're becoming more discriminating about taking on the role.

In 2002, the year the Sarbanes-Oxley Act took effect, 13 percent of those invited to serve on boards declined, according to an annual survey of directors conducted by recruitment firm Korn/Ferry. Two years later, that had more than doubled to 29 percent. In 2005, it almost doubled again, as 59 percent of those surveyed had turned down a board position.

The survey also showed that most board members (62 percent) devote 16 to 20 hours a month to board matters, while 16 percent spend more than 25 hours a month.

Now that being a board member is no longer a walk in the park, it's getting harder to find good people to do it.

"It's gotten to be a bit like politics," said Mitchell Kertzman, a partner at San Francisco venture-capital firm Hummer Wimblad Venture Partners. "The process is so demanding that there are a lot of terrific people who won't run for office because they don't want to put themselves through that. Similarly, a lot of terrific people will not sit on public boards because they feel the cost of time and legal exposure is too high. That's particularly true for financial experts because the finance committee is the most time-demanding committee assignment."

Directors are protected from legal exposure because companies indemnify them and insurance policies cover them in the case of lawsuits. According to a study by Stanford's Klausner, out of hundreds of shareholder securities lawsuits filed since 1980, only 13 have resulted in directors having to pay out-of-pocket costs for settlement or legal fees -- and those 13 included Enron, WorldCom and Tyco, all egregious cases of directorial misconduct.

"The likelihood of personal liability for directors is very remote," Klausner said.

But Kertzman, who has served on numerous corporate boards, said shareholder lawsuits nevertheless are extremely unpleasant for corporate directors.

"The depositions, the discovery, when you go through this, even as an independent director, you feel violated by all this," he said. "They go through your e-mails. It's a very difficult process, not something you want to volunteer for."

Even as board jobs have gotten harder, pay has shot up. Directors at Fortune 1,000 companies reported an annual average retainer and per-meeting fee that totaled $76,707 this year, up 35 percent from 2004, according to Korn/Ferry. Directors at companies with revenue of more than $20 billion made an average $115,375, a 43 percent increase. The figures do not include equity compensation.

That seems like generous money for part-time work. But because board members usually are top executives, retired top government officials, bankers and others at the peak of their profession, according to Grundfest, it's not as munificent as it sounds.

"The workload has increased so significantly that if you look at the amount of money paid to these people and look at how much they could make on a dollars-per-hour basis doing other things in life, believe it or not, you've got a bunch of outside directors who are actually underpaid," he said.

More and more board members are seeking extra support to do their jobs right. Thirteen years ago, Grundfest co-founded a three-day executive education seminar for directors at Stanford. It started with 40 participants. This year the Directors' College at Stanford Law School drew 400 people for seminars such as crisis control, how to run an audit committee, CEO retention and succession, and best and worst ideas in corporate governance.

"The level of interest in this topic has, fair to say, mushroomed," he said.

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